Analysis Claims Sales Tax Holidays May Not Deliver What They Promise

It won’t be long until it’s Back-to-School time in many states – and that could mean a sales tax holiday for many shoppers. At least 17 states will have some sort of sales tax holiday period this year, to provide a temporary break on school supplies, clothing, computers and other items.

But a new report by the Institute on Taxation and Economic Policy - a non-profit, non-partisan research organization that works on federal, state, and local tax policy issues - claims that the real benefits of a state sales tax holiday may be more political than tangible. The Washington, D.C.-based ITEP finds that while tax holidays may seem to lessen the regressive impacts of a state sales tax, their benefits seem to be minimal.

While most state sales tax holidays involve back to school items, a few states exempt all taxable goods during their holiday. Other states have separate sales tax holidays for energy efficient products, severe weather preparedness supplies – even guns and hunting season equipment. Most sales tax holidays last only two or three days, and generally the sales tax holiday applies only to items below a specified price.

ITEP’s analysis finds a few flaws that blunt the impact of a state sales tax holiday on taxpayers.

Tax Holidays Cost Revenue – This year alone, state sales tax holidays will cost states and local governments more than $300 million. That’s revenue, ITEP says, that will have to be made up somewhere else, either by cutting budgets – or raising other taxes.

Consumers May Not Get the Lowest Price – ITEP says there’s no guarantee shady retailers won’t boost their prices to make up for the break in sales tax. In fact, a Florida study found that up to 20 percent of the price cut consumers thought they were getting on the sales tax holiday there was being reclaimed by retailers.

Tax Holidays Create Administrative Costs – Temporary exemptions for sales taxes on a select category of items can create additional layers of administrative costs for state tax agencies and retailers, ITEP says. In some states with local taxing jurisdictions, if the local governments opt out of the tax holiday, additional complexity gets added to the mix.

Wealthier Taxpayers Get the Most Benefit – Those with higher incomes have the flexibility to delay purchases until the state tax holiday – a move that families living paycheck-to-paycheck can’t afford to make, the report finds. Less affluent families also spend most or all their income just getting by, which leaves less disposable income available for the sales tax holiday.

The Institute on Taxation and Economic Policy says if the point of a state’s sales tax holiday is to help lower-income taxpayers, it’s not working.

“If the long-term consequence of sales tax holidays is a higher sales tax rate, low-income taxpayers may ultimately be worse off as a result of these policies,” ITEP says. Instead, the report concludes, lawmakers would do better to consider a permanent refundable low-income sales tax credit or an earned income tax credit to offset the impact of the sales tax on low- and moderate-income taxpayers.

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